Retirement scenarios for the Boomer generation
Boomers say they need to save $385,184 for retirement. But they currently only have about $65,394 saved in their RRSPs, according to a recent survey conducted by Pollara for Bank of Montreal.
For example: If a boomer who is 54 has $65,394 already saved in an RRSP, how many years would it take to increase that value to $385,184?
Let’s say you are debt-free, in your peak earning years and your children have completed their post-secondary education. Now you have some discretionary cash flow. Maybe you can shift into thrift mode and save $1,000 per month.
If you deposit $1,000 per month and pick investments that grow by four per cent per year, you could meet your savings goal by age 70. Unfortunately, the problem is the short time frame available. Sixteen years is not just enough time for compound growth to work its magic.
If you can save $1,000 per month and your investments can grow at eight per cent per year, you could reach your target by age 65. Of course, that is quite an ambitious rate of return. You cannot stick to GICs. You would surely need to tolerate the risks of investing in the stock market, which we know has been rather volatile in recent years. As you get closer to retirement you will probably want to gradually reduce your risk, not increase it.
It is too easy for a fiftysomething boomer to become a sucker for get-rich-quick schemes involving borrowed money (leveraging) or Ponzi schemes which offer rates of return that are too good to be true. You should not try to make up for lost time by speculating with your hardearned savings.
Cash flow possible
Suppose you manage to achieve your savings goal. How much cash flow can you receive from your $385,184 RRSP?
We need to assume you will be retired for 30 years, say, from age 65 to 95. You can simply divide the $385,184 RRSP value by 30 years. That would give you about $12,800 to spend per year. For easy figuring, we will assume that any growth you earn on your investments would be just enough to keep up with inflation and cover income tax. Basically you are rationing out your capital evenly over the 30 years.
Next, we will assume you qualify for maximum Old Age Security (OAS) of $6,764 per year and maximum Canada Pension Plan (CPP) retirement benefits of $12,780 per year. That should give you about $32,000 before-tax annual cash flow. Since you’d only pay about $3,000 of income tax, you should have about $29,000 per year to spend.
What about an employer pension? Unless you work for the government, you probably do not have an employer pension plan since only 25 per cent of private sector employees belong to pension plans.
Small RRSP
What if you’re ready to retire and all you have saved is your $65,394 RRSP? How much cash flow can you expect? You could only expect to withdraw about $2,100 per year from the RRSP. Add your OAS and CPP, and you’d have roughly $22,000 of annual income. You would pay almost no income tax due to your basic, age and pension credits.
With that amount saved, you might want to buy an RRSP life annuity. You might also consider withdrawing all the RRSP over a couple of years, paying the tax and depositing as much as you are allowed into a TFSA. Then, apply for Guaranteed Income Supplement.
There are websites with online calculators to test out savings and cash flow scenarios. Start with the Canadian Retirement Income Calculator on the Service Canada website (www.servicecanada. Terry McBride, a member of Advocis, works with Raymond James Ltd. (RJL). The views of the author do not necessarily reflect those of Raymond James Ltd. (RJL). Information is from sources believed reliable but cannot be guaranteed. This is provided for information only. Securities offered through Raymond James Ltd., member of the Canadian Investor Protection Fund. Insurance services offered through Raymond James Financial Planning Ltd., not a member of the Canadian Investor Protection Fund.